From stocks and bonds to property, cryptocurrencies and commodities, Harvey Jones analyses which asset classes will be the winners over the next 12 months
What does 2018 hold for your investment portfolio?
Last year turned out to be a bumper year for investors, as the doomsayers were proved wrong and asset prices continued to fly.
Stock markets in the US and Europe grew about 20 per cent, while emerging markets jumped 30 per cent, according to MSCI. Even the Brexit-plagued UK turned in double-digit growth, ending the year on a high to return 17 per cent.
The global property market held firm, while the astonishing 1,800 per cent surge in crypto-currency bitcoin took place in 2017 before a pullback at the end of the year.
The result is that investors are feeling more optimistic going into 2018. So are we in for another bumper year or could today’s more positive mood also turn out to be misguided?
There is plenty to worry about, including the US president Donald Trump, North Korean missile testing, Chinese debt, Russian aggression, Brexit disarray and Middle East uncertainty.
There are new fears too, with analysts wondering whether inflation is finally set to make a comeback. So what does this year hold for your investment portfolio?
The IMF reckons the global economy will pick up speed to grow a healthy 3.7 per cent in 2018, up slightly from 3.6 per cent last year.
Accountancy firm PwC’s Global Economy Watch is even more optimistic, forecasting the world will grow almost 4 per cent, adding an extra US $5 trillion to global output. The main engines will be the US, emerging Asia and eurozone, which should all pick up speed.
Barret Kupelian, senior economist at PwC, says: “We expect global economic growth to be broadly based in 2018, rather than dependent on a few star performers.”
Brexit uncertainty will drag on UK growth, which it puts at a sluggish 1.4 per cent. China, the world’s largest economy, will slow but still grow 6 to 7 per cent.
Yael Selfin, chief economist at global accountancy firm KPMG, says the biggest challenges are political rather than economic, and warns there could be shocks on this front, such as a collapse of negotiations on the North American Free Trade Agreement between the US, Mexico and Canada, which could hit other global trade deals.
“Italian elections and an unstable German government may weaken the EU, Brexit could hurt the fragile UK, while elections in Mexico and Brazil may create a less favourable business agenda in Latin America,” Ms Selfin says. She adds that central bankers, led by the US Federal Reserve, are slowly unwinding years of easy money by raising interest rates and cutting back on monetary stimulus such as quantitative easing. “If rising inflation pushes them to tighten more aggressively, volatility may return.”
However, she remains optimistic: “Like 2017, the year could positively surprise us with a smoother monetary transition and more encouraging political outcomes. Let’s hope this is the case.”
Global stock markets have been on a bull run for almost nine years, but investors continue to view them with suspicion.
Chris Beauchamp, chief market analyst at online trading platform IG Index, says this is unlikely to change in 2018. “When the stock market rises people treat it as a bubble, and when it dips they claim the bubble has finally burst.
“However, if everybody is predicting a market crash, it probably isn’t going to happen.”
Mr Beauchamp expects the bull market to continue against a stable economic backdrop, strong earnings growth and continued easy monetary policy, and investors should keep their cool.
“Stocks look expensive, but strong earnings growth supports today’s valuations. Further crises will no doubt provoke bouts of panic, but we believe they will turn out to be buying opportunities.”
Alistair Jex, head of discretionary management at private banker Coutts, says Mr Trump’s $1.5tn tax bill, which cuts corporation tax from 35 to 20 per cent, should boost US company earnings and the stock market. “US economic growth continues to drive positive market momentum worldwide, and these tax cuts may boost that further.”
However, US stocks look expensive after recent growth.
“We believe European and Japanese equities offer relatively attractive valuations and stronger earnings growth potential.”
John Greenwood, chief economist at fund manager Invesco, is also optimistic about the US.
“I believe the current US expansion has further to go and could become the longest in its history. The eurozone is gaining momentum, while a modest increase in global trade is likely to support Asian economies, including China.”
However, Russ Mould, investment director at online platform AJ Bell, warns against being too optimistic. “Markets are at their most dangerous when making money looks easy. Investors should take less risk when markets are running hot and more when they are running cold, so caution may be warranted.”
US equities have momentum on their side, busting through one all-time high after another, but he warns they have only been this expensive three times in history, in 1929, 1999 and 2007, so beware.
The big stars of 2017 were the so-called Fang technology stocks, Facebook, Amazon, Netflix and Google parent Alphabet, but today’s lofty valuations leave room for disappointment, Mr Mould says. “These tech stars could cool as investors hunt for better value stocks.”
The US Federal Reserve increased interest rates three times in 2017 and Mr Mould says further tightening could punish a range of asset classes. “Stocks, bonds, cryptocurrencies, art – you name it – have all feasted off cheap money.”
Gold and silver could be surprise packages, Mr Mould says. “Gold grew a respectable 10 per cent over the last year, which pales next to bitcoin. However, if inflation does return, gold and silver may come back into favour as a store of value.”
Tom Anderson, a chartered wealth manager at the independent financial advisers Killik, who advises clients in Dubai, is crossing his fingers and hoping for another year of 20 per cent returns on the world index. “However, I suspect 2018 will bring creeping inflation and greater stock market volatility instead.”
Michael Grady, senior economist and strategist at Aviva Investors, says it could be a tough year for bond investors if inflation returns and central bankers hike interest rates.
Bonds pay a fixed rate of interest, which is less attractive when interest rates are rising and cash offers a better return. “Equities are likely to outperform fixed income in these conditions, with emerging markets, eurozone and Japanese equities offering better relative value than US and UK stocks.”
Tom Stevenson, investment director for personal investing at Fidelity International, says another three US rate hikes in 2018 will punish bonds. “Finally, after 30 years, the bond market bull run could finally be drawing to a close.”
Oil-exporting countries enjoyed some respite in 2017 as the Opec production cuts held and Brent crude ended the year at nearly $67 per barrel.
Most analysts expect oil to stabilise at these levels, with PwC predicting Opec and its allies, such as Russia, to extend its 1.8 million barrels per day supply cuts until the end of this year, which should spell good news for the Gulf, especially reforming Saudi Arabia.
Mr Beauchamp says rising US inventories suggest Opec’s drive to reduce the global oil glut is working, but there is one sticking point. “With corporate taxes in the US set to fall, the already streamlined shale oil industry is set for another boost. If output continues rising, this could limit price growth.”
Fawad Razaqzada, technical analyst at Forex.com, agrees that a fresh shale splurge could hit oil. “However, there is little sign of it happening yet.”
Paris is set to blaze a trail in the global property market in 2018, says Kate Everett-Allen, head of international residential research at property experts Knight Frank. “Paris has struggled in recent years but is now benefiting from the improved economic outlook for the eurozone.”
Investors in the Middle East, US and Europe are starting to take note. “We expect to see healthy price growth next year, perhaps up to 9 per cent,” she adds.
Ms Everett-Allen also tips Hong Kong, Berlin and Sydney, which should all grow around 7 per cent next year. “Hong Kong, with ongoing demand from mainland China, is likely to post the strongest growth of major Asian urban markets.”
Singapore and Madrid should grow 5 per cent, and Geneva and Los Angeles around 3 per cent. “Singapore’s luxury residential market will shift up a gear in 2018 as market sentiment improves after years in the doldrums.”
Ms Everett-Allen says Dubai has slipped behind rival global cities lately and will only grow a "modest" 1 per cent this year. “Government investment in the economy and infrastructure ahead of Expo2020 are helping to attract more employment, driving demand higher,” she adds.
London will rise by a meagre 0.5 per cent, as Brexit and taxes on foreign investors continue to take their toll.
Global hotspot Vancouver is the only city where Knight Allen expects prime residential prices to fall in 2018, but only by 2.5 per cent. “The introduction of a foreign buyer tax in 2016 along with tighter capital controls in China have hit demand.
Islay Robinson, chief executive at global property brokers Enness, which has offices in Dubai, says many Gulf residents continue to target London despite current political concerns, and it has seen a 31 per cent increase in enquiries from Middle East clients. “Many of our large residential deals have been for Gulf Cooperation Clients either investing or refinancing in London. These clients want to hold on to their UK investments and today’s confidence slump will soon correct.”
Bitcoin and the other critical currencies dominated the headlines in 2017 and will doubtless do so again; because whether they rise or fall, they are likely to do so at speed.
Their volatility remains astonishing, with bitcoin touching $20,000 in December before crashing back to end the year at around $14,000.
This may scare away many, especially those who piled in at the last minute only to see their holdings plunge.
Mark Ward, head of trading at fund manager Sanlam, says bitcoin has little real world use or intrinsic value, making it impossible to judge its real worth. “However, if people decide something has value, then it has value.”
Whether bitcoin tops $100,000 or collapses to nothing is anybody’s guess. Only one thing is certain: you should only invest money you can afford to lose.
Sam Instone, chief executive of Dubai-based AES International, says nobody can consistently forecast financial markets, and you should not put too much faith in predictions.
However, some things can be guessed with reasonable accuracy. “Markets will go up and down, investors will continue to buy and sell at the wrong time, and people will gamble on bitcoin and other headline-grabbing investments. Wise investors should ignore the noise and focus their energies on the basics, such as building a diversified portfolio with the lowest possible charges and investing for the long term.”
Mr Instone’s New Year’s wish is that more UAE expats will shun expensive insurance-based plans in favour of low-cost, flexible alternatives such as exchange traded funds (ETFs), and put themselves in charge of their own money. “Ultimately, that is more important than where markets go over the next 12 months.”